Concept of budgeting/Forcasting

A Budget

§ A plan that outlines an organization's financial and operational goals.

§ So a budget may be thought of as an action plan;

§ planning a budget helps a business allocate resources, evaluate

  performance, and formulate plans.

§ While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years.

A financial forecast

§An estimate of future financial outcomes for a company .

§Using historical internal accounting and sales data, in addition to external

  market and economic indicators,

§A financial forecast is an economist's best guess of what will happen to a company in financial terms over a given time period—monthly, quarterly and yearly.

§Future costs can be estimated by using historical accounting data; variable costs are also a function of sales.

§Unlike a financial plan or a budget, a financial forecast doesn't have to be used as a planning document.

§Outside analysts can use a financial forecast to estimate a company's success in the coming year.

 

Arguably, the most difficult aspect of preparing a financial forecast is predicting revenue.